As a lover of classical music, Brian Lenihan would appreciate the Wagnerian overtones. A country that emerged from relative poverty in the final quarter of the 20th century allowed itself to believe that the good times would last for ever. It borrowed too much. A wild property boom led to a savage bust. The economy shrank. Jobs were lost. Foreign companies closed their plants. Banks tottered. The commentator s who once lauded the Celtic tiger now warn of the twilight of the gods.

Lenihan is confident that Ireland will avoid its Götterdämmerung but admits that he has not had much time to indulge his passion for music since becoming Ireland's finance minister 12 months ago.

"I walked straight into the firestorm," he says in his office at the Dáil in Dublin. "We have had four budgetary adjustments in a year, and last September we had a banking meltdown."

The crisis has forced Lenihan to become Mr Austerity, Ireland's answer to Sir Stafford Cripps, the Labour postwar chancellor. Salaries of public sector workers have been cut, taxes have risen, health entitlements for the elderly have been pared back. While the rest of the world has been using fiscal policy to pump-prime the economy, Lenihan has been responsible for a squeeze worth 4.5% of GDP. "We have moved fast. I am a great believer in fast and decisive action. Corrective action had to be taken."

In truth, Lenihan looks more like the prosperous barrister he once was than a hatchet man. He comes from a political dynasty and is keen to talk about how his grandfather was an avid reader of the Manchester Guardian and how his dad once played for Ireland's amateur football team.

It is perhaps not surprising that the finance minister prefers a bit of nostalgia to the current reality. Ireland is a country in deep recession, bordering on depression. Unemployment is expected to peak at 17% next year, with an economic contraction of around 9% this year followed by a tough 2010. Lenihan has nationalised the bank that lent most unwisely during Ireland's housing bubble and is planning to inject capital into two others. He has set up a "bad bank" to manage the underperforming, often worthless, loans that were provided for developers during the boom.

Tsunami

"It has been very challenging. My family is steeped in the commercial life of the country. I lectured in commercial and banking law so I was aware of a lot of the issues. But I never expected to deal with them in the context of a financial tsunami."

Lenihan is frank about what went wrong: the export-led growth of the 1990s that allowed living standards to catch up with – and then surpass – the European Union average turned into frenetic domestic expansion fuelled by cheap money.

Membership of monetary union has been both a benefit and a hindrance to Ireland during the crisis. The downside has been that Ireland's fixed exchange rate means the only way it can regain international competitiveness is through the long, hard slog of driving down costs, rather than through the quick fix of devaluation. The upside is that the country has had the full weight of the European Central Bank behind its banking system over the past 18 months.

Lenihan is in no doubt that membership of the euro has helped.

"It is true that membership of monetary union means that the only way you can adapt is by reducing your costs. But we are very fortunate to be in the eurozone."

One of the jokes doing the rounds of the markets a few months ago was that the only difference between Iceland and Ireland was one letter and six months. Lenihan does not find the quip funny. There will be no Icelandic-style collapse of the banks; no unscheduled visit from an International Monetary Fund hit squad. "That's impossible. We are in the euro. The eurozone is not going to break up. Frankfurt stands totally behind the Irish banking system."

As a founder member of the euro, Ireland found itself with an abundance of easy credit. "When we changed to the euro, we had cheap credit. Financial institutions were over-leveraging, offering 100% mortgages and financing developers. We had a construction bubble that turned into a bust."

At its peak, construction amounted to 15% of the Irish economy and produced 100,000 new homes. Since the autumn of 2006, the property market has been in decline, wiping around 40% off house prices.

The institution that caused Lenihan the biggest headache was Anglo Irish bank – Ireland's answer to Northern Rock. Like the Rock, Anglo Irish grew too big too fast. Like the Rock, it had a chief executive with ambitions to expand. Like Northern Rock, it made unwise lending decisions. And like Northern Rock, it is now in state hands.

"Anglo Irish became a very large bank. It specialised in a monoline business, lending money to builders and developers. By late last year it was clear there were serious issues of corporate governance."

Lenihan says that the property crash on its own would have ensured a recession in Ireland. But what he calls "a perfect storm" has been compounded by two other factors – the collapse in world trade and the 30% depreciation in sterling.

Bubble

In retrospect, there is a recognition that Ireland should have adopted a far tougher fiscal stance during the boom, using tax increases or spending constraint to offset the impact of the lax monetary policy inevitable as a result of membership of the eurozone. Some analysts did suggest during the boom years that the government levy a tax on mortgage payments in order to deflate the property bubble, but the warnings went unheeded.

"No party said property taxes should go up," Lenihan says, noting that at the time Ireland was already running a healthy budget surplus. "We had had strong growth for two decades. Exuberance developed at the end and you had a crash landing."

But what was once a healthy budget surplus has now become a massive budget deficit, and a need to reassure those buying Irish bonds and the credit-rating agencies has forced Lenihan to take demand out of the economy at a time when prices are already falling. "It is a fine balance. There is a limit to how far you could go. We have made a relatively generous provision for capital spending."

When will the Celtic tiger roar again? As befits a lawyer, Lenihan chooses his words carefully.

"There will be a return to growth. It is a question of when. We have a solid export base and we can build it up again. When the world economic recovery happens we will be in a good position to take advantage."

Ireland's recent export performance suggests there are grounds for optimism. Strength in pharmaceuticals, health equipment and IT services has meant that exports have fallen much less sharply than in China, Germany or Japan.

So does Lenihan see green shoots? Again, a carefully worded response. "I see a bottoming out. The rate of increase in unemployment has moderated. In the banking system, there is a stabilisation."

He sees no need to administer any more pain during 2009. Whether Lenihan will be able to make good on his pledge remains to be seen. Irish voters have their say in next week's European and local elections. A wipeout for Lenihan's Fianna Fáil party would precipitate calls for an early general election.